Glencore IPO: A Chinese Connection?

It looks like secretive Swiss trading house Glencore International AG’s long-awaited IPO is finally going to happen, in the form of a dual listing in Hong Kong and London. Apart from the usual suspects, bankers will likely be fine-tuning their sales pitches to Chinese companies that need what else, but commodities.

Reuters

Large investors such as the Government of Singapore Investment Corp., China’s Zijin Mining Group Co. and BlackRock Inc., as well as U.S. private-equity firm First Reserve Corp., are already lined up for the listing after they subscribed to Glencore’s $2.2 billion convertible bond issue in December 2009. People familiar with the deal say bankers will target sovereign wealth funds in Asia and the Middle East, as well as Chinese investors and Hong Kong tycoons as so-called “cornerstone investors.”

But bankers will no doubt be focusing their efforts on Chinese companies who can no longer just rely on buying assets to safeguard their energy and commodity supplies. PetroChina Co. might be one logical candidate. The state-owned oil giant took another step towards joining the ranks of Western oil majors –- who, with their big trading arms, are able to buy and sell oil for their own hedging purposes — when it recently signed an agreement with privately held British refiner Ineos Group Holdings PLC to share refinery technology and establish a trading partnership.

That deal comes after PetroChina signed term contracts with Singapore Petroleum Co. in March last year to secure access to its Asian marketing and distribution networks, as well as actively securing oil storage in Singapore. It’s also been buying large volumes of oil products from South Korean and Taiwanese refiners.

To illustrate just how important Glencore’s role is in the world of commodities trading, a Wall Street Journal article from 2007 says Glencore is such a key player in the global commodities trade that “at times it hold 50% to 90% of the nickel and aluminum scheduled for delivery in London Metal Exchange warehouses.” A Bank of America Merrill Lynch note describes Glencore’s role as that of a market intermediary, sourcing commodities from third-party suppliers, mainly small mining companies, matching them with buyers, though it also markets products for some big names such as Xstrata PLC and United Co. Rusal PLC. The strategic value of a relationship with Glencore to manage China’s appetite for commodities wouldn’t be lost on its state-owned firms.

It’s also famously, or infamously, known for its ability to get to important commodities in some rather unsavory places. In one instance, the company was implicated in the United Nations report on the Iraq oil-for-food scandal in 2005, when it was accused of paying kickbacks to get access to Iraqi oil.

Remember that the Chinese are still relatively new to this game, and have encountered some setbacks in the past. China’s State-owned Assets Supervision and Administration Commission said in 2009 that it encouraged Chinese firms to seek recourse from foreign banks over huge losses by Chinese airlines and shipping companies from oil derivative contracts, concerned that companies were getting into something they didn’t really understand.

But China’s thirst for commodities isn’t going to dry up any time soon; if it wants to get into the world of trading, with its savvy bankers and exotic instruments, it’s probably going to need the help of a big name like Glencore.

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